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Home , Credit spread (options), Debit spread

YOUR QUICK START GUIDE TO OPTIONS SUCCESS

Don Fishback IMPORTANT DISCLOSURE INFORMATION Fishback Management and Research, Inc. (FMR), its principles and employees reserve the right to, and indeed do, trade , mutual funds, op?ons and futures for their own accounts. FMR, its principals and employees will not knowingly trade in advance of the general dissemina?on of trading ideas and recommenda?ons. There is, however, a possibility that when trading for these proprietary accounts, orders may be entered, which are opposite or otherwise different from the trades and posi?ons described herein. This may occur as a result of the use of different trading systems, trading with a different degree of leverage, or tes?ng of new trading systems, among other reasons. The results of any such trading are confiden?al and are not available for inspec?on.

This publica?on, in whole or in part, may not be reproduced, retransmiDed, disseminated, sold, distributed, published, broadcast or circulated to anyone without the express prior wriDen permission of FMR except by bona fide news organiza?ons quo?ng brief passages for purposes of review.

Due to the number of sources from which the informa?on contained in this newsleDer is obtained, and the inherent risks of distribu?on, there may be omissions or inaccuracies in such informa?on and services. FMR, its employees and contributors take every reasonable step to insure the integrity of the data. However, FMR, its owners and employees and contributors cannot and do not the accuracy, completeness, currentness or fitness for a par?cular purpose of the informa?on contained in this newsleDer.

Although we do not provide any futures informa?on, the CFTC provides an excellent descrip?on of the limita?ons of hypothe?cal trades and, therefore, we are providing it to you: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

OPTIONS INVOLVE RISK AND ARE NOT SUITABLE FOR ALL . PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

ODDS® is a registered trademark of Don Fishback. CBOE, Bloomberg, S&P 500 and all other trademarks, servicemarks, registered trademarks, and registered servicemarks are the property of their respecDve owners. Copyright © 2017, Don Fishback, All Rights Reserved Table of Contents INTRODUCTION ...... 4 ENTERING OPTIONS ORDERS ...... 6 IDENTIFICATION ...... 6 UNDERLYING ...... 6 ACTION ...... 6 OPENING OR CLOSING TRANSACTION ...... 7 QUANTITY ...... 7 ...... 7 ...... 8 TYPE ...... 8 ORDER TYPE / PRICE ...... 8 1. IDENTITY ...... 10 2. UNDERLYING ...... 10 3. BUY OR SELL ...... 10 4. OPEN OR CLOSE ...... 10 5. QUANTITY OR NUMBER OF CONTRACTS ...... 10 6. CONTRACT ...... 10 7. TYPE OF ORDER ...... 10 ORDER TYPES ...... 12 MARKET ORDER ...... 12 LIMIT ORDER ...... 14 BUY LIMIT ...... 14 SELL LIMIT ...... 16 STOP ORDER ...... 18 BUY STOP ...... 18 SELL STOP ...... 20 GTC ORDER ...... 23 ORDERS FOR MULTIPLE STRATEGIES ...... 25 VERTICAL ...... 26 PUT DEBIT SPREAD (also known as BEAR PUT DEBIT SPREAD) ...... 28 VERTICAL SPREAD ...... 30 CALL ...... 30 PUT CREDIT SPREAD ...... 33 AND STRANGLES ...... 36 ...... 36 ...... 38 WRITE THINGS DOWN ...... 40 KEEPING TRADE RECORDS ...... 41 INDIVIDUAL CONFIRMATIONS ...... 41 TRADING LOG ...... 41 OPEN ORDER LOG ...... 41 TRADING IS A BUSINESS ...... 42 GLOSSARY OF COMMONLY USED OPTIONS TERM ...... 43 INTRODUCTION

Mastering the fundamentals of any sport, business, or other ac?vity is important if you expect to succeed.

Before going out on the PGA tour, my uncle learned how to hold a golf club, address the ball, improve his swing, and a myriad of other game fundamentals. It is no different when trading.

In fact, it’s even more important. That’s because, at least with professional sports, it’s the pros versus the pros. But in trading, even the beginners trade with the professionals.

Trading is a business. And it’s up to you to learn the fundamental aspects of this business if you want to have a chance to be a winner in this game – a game where amateurs and pros compete against one another each and every second.

So what are the fundamentals of op?ons trading? Contract specifica?ons, market behavior, exchange trading hours, money management, risk-reward parameters, and market analysis to name just a few. And, of course, order entry.

The types of orders available, how they differ, what to expect when placing orders, and how to enter orders properly are fundamental to the art of successful trading. That is what this book will focus on. Because if you don’t know or master order entry, you have no chance at long-term success.

That does not mean knowing proper order procedure will make you a great trader, just as knowing how to dribble a basketball does not make you an All-Star. But not knowing how to place orders properly could have a nega?ve impact on your trading results.

I know, because I see it all the ?me.

So why, ajer all that, would anyone even aDempt to trade? Well, for one thing, trading can be profitable. Trading can also be fun. Trading also lets you validate your ideas. Trading can also produce the opposite of these posi?ve effects. The difference is not luck.

The difference is mastering the trading business through learning and experience in the same way we would expect to achieve posi?ve results in any new venture. We have tried to present this informa?on on order entry in a straighkorward, easy to follow format.

Our hope is that this book will add to your fundamental knowledge, and help you master skills that will help you trade successfully. ENTERING OPTIONS ORDERS

One of the most important aspects of successful trading is learning to enter orders correctly.

You can analyze markets, subscribe to the best trade recommenda?on services, and learn to employ sound money management techniques and all of that will be important at some point. But if your order goes in wrong, you will not get the posi?on or market ac?on you expected.

Proper order entry is one of those basic, fundamental ac?ons that should become second nature to you. You must enter your orders properly each and every ?me, and all orders must contain at least nine vital pieces of informa?on.

A quick note about the sequence below. In almost all instances, you’ll first need to idenDfy yourself, and then provide the underlying asset. But aQer that, the sequence in which you enter these various pieces of informaDon varies from firm to firm.

IDENTIFICATION Iden?fy yourself with your Account Number. When entering an order online, this is done for you when you log in. When entering an order by telephone, the first thing you’ll need to do is provide your Account Number.

A brokerage firm will not execute an order if the company cannot iden?fy the trader. The receiving computer, phone clerk, or broker uses that number to iden?fy you and determine whether or not there is enough equity in the account to cover financial commitments required for new posi?ons.

UNDERLYING This is the or index upon which the op?on is based. The underlying is a , ETF, closed end fund, ADR, or an index. Depending upon what you choose as the underlying, the could be either physical delivery or .

And for the seDlement, it could be either European style or American style. If you need to familiarize yourself with these terms, we highly recommend may we suggest you check out www.whatareop?ons.com.

ACTION Ac?on is the process of buying or selling. The broker must know whether to buy or sell for your account. Remember, if you hold a short posi?on and are liquida?ng, or covering that posi?on, your order is to buy, not sell.

Under stressful condi?ons a trader might think, "I have to get out of my short posi?on right now," and mistakenly enter an order to sell the posi?on with the intent to exit the trade. Instead of offsemng the short posi?on by buying it back, however, the trader actually doubled the short posi?on.

OPENING OR CLOSING TRANSACTION As part of the Ac?on, you need to dis?nguish whether the buy or sell is an opening transac?on or closing transac?on. Placing an op?on posi?on in your account (either buying or wri?ng) is an opening transac?on and adds to the op?on's calcula?on by the exchange.

Removing the op?on posi?on is a closing transac?on. When entering by computer follow instruc?ons on the screen, typically clicking on "Open" or "Close."

QUANTITY This is the number of contracts to buy, sell, or spread. It is possible to receive a par?al fill when entering mul?-contract orders, such as filling only 3 contracts where the order was to buy 5.

It is also possible to receive different fill prices, such as 2 filled at $3.00, 1 filled at $3.10, and 1 filled at 3.20 on an order to sell 4. By the way, here is some industry jargon for you. When there is an order to buy or sell 5 contracts, we call it a five-lot. If the quan?ty is 4 contracts, we call it a four-lot.

EXPIRATION You must accurately iden?fy the expira?on date (also known as series). This is important, and a common source of error we see all too oQen, even with experienced traders. And believe it or not, it’s gemng even more complicated.

Years ago, op?ons only expired – or should I say, stopped trading – on the third Friday of the month. They actually expired on the following Saturday. Now, equity op?ons expire on the day they stop trading. Not only that, we now have weekly op?ons.

They expired on Fridays too. We also have quarterly op?ons that expire on the last trading day of the quarter, no maDer what day of the week. And now, we have the addi?on of op?ons that expire on Mondays and Wednesdays.

Because of the prolifera?on of so many poten?al expira?on series, it is impera?ve that you iden?fy the exact day that your op?on expires. Whether entering by phone or by computer, you need to provide the month, the day of the month, and the year.

Fortunately, when entering by computer, the broker usually gives you a selec?on from which to choose. That makes it easier, but you s?ll need to be very careful when selec?ng your expira?on date. STRIKE PRICE To properly iden?fy the op?ons you want to buy or sell, you need to provide the strike price of the op?ons involved in the transac?on.

Addi?onal informa?on on strike price can be found at www.whatareop?ons.com.

TYPE Here you iden?fy the op?on as a put or a call.

ORDER TYPE / PRICE This is how you tell the broker when or at what price to fill your order. The following sec?on will discuss various types of orders in detail so that you get the right price. Certain types of orders require addi?onal informa?on that will be discussed in the following sec?on on order types.

Most online trading systems will ask you specific ques?ons about the topics discussed above and will display a list of answer choices.

As an example, assume that you are on-line and entering an order to "BUY TO OPEN 2 FACEBOOK SEPTEMBER 15, 2017 150 CALLS AT THE MARKET".

We’re going to use images from several different brokerage plakorms to so that you can get an idea of what’s out there as it relates to order entry.

Here’s what it looks like if you’re using Fidelity’s basic on-line system, which is one of the brokerage firms I use.

No?ce all the selec?on menus. Having everything pre-filled so you’re simply selec?ng from a menu makes the process much easier. 1. IDENTITY Log in and make sure the proper account number is being used. It will then take you through the proper sequence for entering an order by asking:

2. UNDERLYING Enter the ?cker symbol of the stock, ETF, or Index whose op?ons you want to trade.

3. BUY OR SELL Click on the correct response. Using our example, you click “Buy”.

4. OPEN OR CLOSE In our example, we chose open. In some situa?ons, the open or close selec?on is incorporated into the Buy or Sell.

5. QUANTITY OR NUMBER OF CONTRACTS Enter the correct number of contracts. “2” in our example

6. CONTRACT Here you iden?fy the type (put or call), the expira?on date, and the strike price.

7. TYPE OF ORDER Choose the correct order type on the pull-down menu. In our example, click on “Limit” and enter limit price, “7.45”

The screen will display your order in printed form and give you the opportunity to make any correc?ons:

Be sure to look closely. This is your chance to fix any mistakes. If there are mistakes, you can click the Edit Order buDon. If there are no mistakes and you’re ready to implement the trade, just click the Place Order buDon.

This is important. Your order is not filled if you do not receive a confirma?on from your brokerage firm. Never assume anything.

The brokerage firm computer receives informa?on and instruc?ons that you provide and cannot know that you want the order to trade several sessions (open order), or that you really meant to place a stop order. Be careful! Keep records!

When entering orders through a trading desk, keep in mind that you are giving instruc?ons to a phone clerk who may or may not know anything about what you are doing. If you are short the market and want to get out of your posi?on, the order is to "Buy" it back, which means you want to Buy to Close. But if you mistakenly say "Sell" the clerk will write "Sell" and does not know that you are covering a short posi?on and should have said "Buy." Be careful! Keep records!

Even when entering orders through a live broker you must take the ?me to do things correctly. Be careful! Keep records! In the unlikely event that there is an error, alert your brokerage firm immediately. There is a limited ^me in which to have any errors corrected, even if the error is caused by the firm. It is important that you check your confirma^on. ORDER TYPES

MARKET ORDER

The most common type of order is the Market Order. Market Orders are used primarily when immediate order execu?on is required. When entering a Market Order, you state the number of contracts you want to buy or sell.

You do not specify a price, since your objec?ve is to have the order executed as soon as possible at the best possible price. Once a Market Order is placed, it is filled and cannot be canceled.

As an example, in an?cipa?on of a decline in tech stocks you want to implement a bearish trade on Microsoj. You enter an order to BUY TO OPEN 5 MICROSOFT AUGUST 25, 2017 69 PUTS AT THE MARKET

To enter a Market Order to buy 5 of the puts, you need to provide the following informa?on:

1. Account Number: 0465 2. Underlying MSFT 3. Expire August 25, 2017 (Week 4) 4. Strike 69 5. Type Put 6. Market Action: Buy 7. Open or Close: Open 8. Quantity: 5 9. Order Type: Market

The puts are 2.01 bid / 2.15 ask. Because you are using a market order, your order will be filled at the best possible price, which may be below, at or above 2.15. The key is, the order will be filled immediately. If condi?ons are normal, you should expect a fill somewhere near 2.15. If condi?ons are hec?c, however, the fill could be dras?cally different.

Here’s what it looks like using my account at op?onsXpress by Charles Schwab.

No?ce in this example that the expira?on date is different: AugWk4. Schwab provides the month (August) and the week (Week 4). That means the op?on is a weekly op?on that expires on the 4th Friday of the month of August, which is August 25.

[NOTE: I have to say that I don’t really like using the Wk# style to designate the expiraDon. I’ve seen too many people who use a system like this make too many unforced errors. For those of you whose broker uses this type of expiraDon designaDon, you need to be extra vigilant.] LIMIT ORDER A Limit Order specifies a price limit at which the order must be executed. In other words, it must be filled at that price or at a beDer price.

The advantage is that you know the worst price you will get if the order is executed. The disadvantage is that you cannot be certain that the order will be filled because the market may not trade at your price.

BUY LIMIT If you want to be sure that when you are buying that you pay no more than some maximum price, then you use a Buy Limit order. Typically, the order price is lower than the current market price.

By way of example, the NETFLIX AUGUST 18, 2017 150 CALLS which are trading at 8.60 bid / 8.75 ask. Let’s say you would like to BUY TO OPEN 2 calls but not at the price shown.

You are only willing to buy it if the price is $800 or less. If the price does not come down to what you are willing to pay, you are willing to risk not gemng into the trade. To accomplish this, you use a limit order.

To enter a Limit Order to buy these op?ons, which would be an opening transac?on, you need to provide the following informa?on:

1. Account Number: ABC30D 2. Underlying NFLX 3. Expire August 18, 2017 4. Strike 150 5. Type Call 6. Market Action: Buy 7. Open or Close: Open 8. Quantity: 2 9. Order Type: Limit 10.Price: 8.00

Here is how I enter this trade in my MoneyBlock account:

No?ce in this image, there is a table at the boDom called an Op^on Chain. I simply click on the op?on I want to trade. That’s preDy easy. Also no?ce that this plakorm has the expira?on date and the week of the month. It’s like a combina?on of Fidelity and op?onsXpress.

Above the chain is the trade itself. Because this is a limit order, the order can only be filled at the Limit Price of 8.00 or beDer. Because I am buying, the “beDer” price is lower. If the market never trades that low you will not be filled. You may not be filled even if the market trades at 8.00 but not lower because there is no guarantee that enough contracts changed hands at that price to fill all orders. If the market trades below 8.00 you are filled at your price or lower.

Remember that the only ?me you can be certain your order was filled is if the market trades beDer than the stated price. When buying, a beDer price is lower than the stated price. When selling, a beDer price is higher than the stated price.

SELL LIMIT If you want to be sure that when you are selling that you receive some minimum price, then you use a limit order. Typically, the order price is higher than the current market price.

By way of example, the AT&T SEPTEMBER 15, 2017 36 PUT which is trading at 0.61 bid / 0.62 ask. Let’s say you would like to SELL TO OPEN 2 puts (instead of implemen?ng a ), but you want a beDer price than 0.61.

You are only willing to sell the op?on if the price is at least 0.65, or $65 per op?on. If the price of the puts does not rise up to what you are willing to accept as payment for selling the put, you are willing to risk not gemng into the trade. To accomplish this, you use a limit order.

To enter a Limit Order to sell this op?on, which would be an opening transac?on, you need to provide the following informa?on:

1. Account Number: Roth IRA-1234 2. Underlying T 3. Expire September 15, 2017 4. Strike 36 5. Type Put 6. Market Action: Sell 7. Open or Close: Open 8. Quantity: 2 9. Order Type: Limit 10. Price: 0.65

Here is how one of my employees would enter this trade in his ETrade account:

The order can only be filled at the stated price of 0.65 or higher (beDer). You will not be filled if the market does not trade at 0.65 and may not be filled even if it does. The market must trade higher than 0.65 for you to be sure that the order was filled.

NOTE: There are condiDons where the price shown on your screen is above your minimum price, but you sDll want to use a limit order. In this case, the market is experiencing substanDal volaDlity and you want to be sure that you get a minimum price. So, you use a limit order to make sure that by the Dme your order is directed to a market maker, the price hasn’t dropped below your minimum price.

I typically always use a limit order to prevent such an occurrence, thereby avoiding a bad fill on my trade. STOP ORDER A Stop Order specifies a price that, when reached, converts the Stop Order into a Market Order. By placing a Stop Order you are saying that you want to buy or sell on a Market Order, but not at the current market price level. You want the market to trade at a certain price before your order is executed.

BUY STOP When using a Buy Stop, you are specifying a certain price where you want the op?on to trade, before a buy order is executed at a price that is higher than the current op?on price.

As an example, assume your technical analysis indicates that if the market moves higher, it is exhibi?ng strength, and you want to profit from further strength.

Right now, SPY is trading at 242.64. The current at-the-money strike is 243. The 243 call for the September 15, 2017 expira?on is 3.97 bid / 3.98 ask.

You believe that if SPY breaks out such that the SPY SEPTEMBER 15, 2017 243 CALL trades above 6.00, SPY will have broken out to the upside and you want to be long those calls. You place an order to BUY TO OPEN 10 of the calls on a stop should the calls trade at 6.00.

To enter a Stop Order, provide the following informa?on:

1. Account Number: ABC2468 2. Underlying SPY 3. Expire September 15, 2017 4. Strike 243 5. Type Call 6. Market Action: Buy 7. Open or Close: Open 8. Quantity: 10 9. Order Type: Stop 10. Price: 6.00

Here is how one of my employees would enter this trade in his Think or Swim account:

In a textbook situa?on, if the market trades (or is "offered") at 6.00 or higher, your Stop Order will become a Market Order and your order will be filled. Your fill may be 6.00, but it may be higher or lower.

If you had entered the Limit Order to BUY 10 SPY SEPTEMBER 15, 2017 243 CALLS, when the ask price was 3.98, you would have been filled immediately because 3.98 is a beDer price than 6.00. Your Stop Order tells the broker to wait un?l the market reached 6.00 before doing anything. SELL STOP When using a Sell Stop, the price you want the op?on to trade at is below the current price. It is ojen used to protect an exis?ng posi?on from further loss.

Here’s an example using USO, which is the United States Oil Fund, an ETF (exchange traded fund). Let’s assume that you were bullish on Oil and had previously purchased 10 of the USO AUGUST 18, 2017 9 CALL at a price of 0.46.

Now that you are long those calls, you want to try to protect the posi?on against a loss that is worse than 50%, in case you are wrong and USO shares fall. To do that, you would use a SELL TO CLOSE stop, with the price set at half of what you paid.

To enter a Stop Order, provide the following informa?on:

1. Account Number: ABC2468 2. Underlying USO 3. Expire August 18, 2017 4. Strike 9 5. Type Call 6. Market Action: Sell 7. Open or Close: Close 8. Quantity: 10 9. Order Type: Stop 10. Price: 0.23

Here’s what it looks like in Think or Swim:

If the market trades (or is "bid") at 0.23 or lower, your Stop Order will become a Market Order and will be filled. Your fill may be 0.23, but it also may be higher or lower. If the market does not trade as low as 0.23, your order will not be executed and you will s?ll be long the 10 op?ons at the end of the day.

NOTE: You need to be very careful using stop orders on opDons. If the opDons are illiquid, there can be extended periods where the opDons do not trade even while the stock price fluctuates.

This can cause large gap moves in the opDons when an order is placed and filled. As a result, stops can be triggered and your opDon is at a price that is nowhere near where you placed your stop.

Some brokers realize this, and may modify your stop order such that when triggered, the broker will convert the trade into a limit order instead of a market order. The secDon in red in this confirmaDon from Think or Swim illustrates this. GTC ORDER In nearly every trading plakorm, the order you entered is good for that par?cular day only. If the order is not filled by the end of the day, the order expires unfilled.

Good Till Canceled Orders (also known as Open Orders, or GTC) do not cancel un?l the op?on expires. By designa?ng a Limit Order or a Stop Order as Good Till Cancelled, the Limit Order or Stop Order will remain valid and working un?l it you cancel the order, or it is filled, or the op?on expires.

Here’s an example using Apple. Let’s say you want to BUY TO OPEN 5 near-the-money call op?ons on Apple that expire on December 15, 2017. The APPLE DECEMBER 15, 2017 145 CALL is 8.90 bid / 9.00 ask. At 9.00, 5 of those calls would cost $4,500.

You determine that is too high. But if the price drops to 8.00, 5 calls would cost $4,000. That is within your price range. You decide that if the price drops to 8.00, you want to buy 5 of those op?ons.

As noted before, we can use a limit order to accomplish that. But because op?on orders expire at the end of the trading session, if you’re not filled at the limit, you need to re-enter the limit order every morning un?l you are filled, or the op?on expires.

By using a Good Till Canceled order, however, we do not need to re-enter the order. Instead, the order remains “open” and ac?ve, un?l you cancel the order, your order is filled, or the op?on expires.

To enter a GTC Limit Order to buy the 5 Apple call op?ons, you need to provide the following informa?on:

1. Account Number: ABC2468 2. Underlying AAPL 3. Expire December 15, 2017 4. Strike 145 5. Type Call 6. Market Action: Buy 7. Open or Close: Open 8. Quantity: 5 9. Order Type: Limit 10. Price: 8.00 11. Time in Force Good Till Canceled

Here’s what it looks like in Fidelity:

As noted before, the order will remain valid and working un?l it is filled, un?l you cancel it, or un?l the op?on expires.

NOTE: Don’t make this mistake. If you go on vacaDon and come back and decide to just buy the call at a higher price, and you do so by entering an all new order, realize that your exisDng order is NOT canceled. Buying the opDon via a different order does not automaDcally cancel the earlier GTC Order.

GTC ORDERS DO NOT CANCEL AUTOMATICALLY! YOU MUST ALWAYS CANCEL A GTC ORDER IF YOU NO LONGER WANT IT WORKING! ORDERS FOR MULTIPLE OPTION STRATEGIES Straight purchases and sales of puts and calls offer a plethora of wonderful benefits that many traders can u?lize. But the real power of op?ons comes when you combine different op?ons into various strategies.

These strategies involve the simultaneous purchase and sale of different op?ons to establish a posi?on with a specific risk-reward profile. This sec?on will deal with structuring your orders to achieve the desired result.

As we present examples of various op?ons strategies, please keep in mind that the order types covered in the previous sec?on are all operable when entering orders for op?on spreads. In other words, our upcoming examples of op?on spreads may be entered as Limit Orders, Market Orders, Stop Orders, and/or GTC Orders. VERTICAL DEBIT SPREAD A ver?cal debit spread results when simultaneously buying and selling puts or calls on the same underlying, with the same expira?on date, but with different strike prices. The price of the op?on you are buying is higher than the op?on you are selling. Because of that, the net is a payment, or a debit.

The maximum amount that can be earned on a Ver?cal Debit Spread is the difference between the strikes less the debit. The maximum risk is the amount of premium paid out.

CALL DEBIT SPREAD (also known as BULL CALL DEBIT SPREAD) Assume that you are bullish and decide to establish a bullish posi?on in Exxon Mobil (XOM). Your vehicle of choice is a call debit spread. The XOM OCTOBER 20, 2017 77.50 CALL is 4.05 bid / 4.20 ask, while the XOM OCTOBER 20, 2017 82.50 CALL is 1.41 bid / 1.48 ask.

Because you are buying the expensive 77.50 call, and selling the inexpensive 82.50 call, the net debit of the spread is the ask price of the 77.50 call minus the bid price of the 82.50 call. That net debit is 2.79. You would like to BUY TO OPEN 3 of these spreads. But you do not want to pay more than 2.60 per spread. That means you need to use a Limit Order.

You only want to try to enter this trade today, so you use a Day Order, not a Good Till Canceled.

This is the informa?on you’ll need to provide:

1. Account Number: 13579 2. Underlying XOM Option1 Option 2 3. Expire October 20, 2017 October 20, 2017 4. Strike 77.50 82.50 5. Type Call Call 6. Market Action: Buy Sell 7. Open or Close: Open Open 8. Quantity: 3 3 9. Order Type: Limit 10. Price: 2.60 11. Time in Force/Duration: Day

This is what it looks like in op?onsXpress. No?ce that op?onsXpress uses Dura?on instead of Time in Force:

Note that you do not provide a price for the individual op?ons!

When entering an order for an op?ons strategy that involves more than one op?on, you enter the price for the combina?on.

In this case, the order was placed as a limit order at a net debit of 2.60 (per spread) and each spread will be filled at a net price of 2.60 or beDer (less expensive). Since the order was placed as a spread it must be filled as a spread. That means that the broker cannot buy all 3 of the 77.50 calls and sell only 1 or 2 of the 82.50 calls.

When liquida?ng the posi?on, however, the order can go in as a spread or as individual op?ons. PUT DEBIT SPREAD (also known as BEAR PUT DEBIT SPREAD) In this example, we’re going to assume that we have a bearish bias on Johnson & Johnson. We are going to implement a bearish Put Debit Spread.

We will BUY TO OPEN the JNJ JANUARY 19, 2018 130 PUT and SELL TO OPEN the JNJ JANUARY 19, 2018 110 PUT as a ver?cal spread. The JNJ January 19, 2018 130 put is 4.85 bid / 5.20 ask while the JNJ January 19, 2018 110 put is 0.96 bid / 1.14 ask.

Because you are buying the expensive 130 put, and selling the inexpensive 110 put, the net debit of the spread is the ask price of the 130 put minus the bid price of the 110 put, which is 4.24.

Now, let’s say you would like to enter the spread, but you look at the op?ons prices and realize that the difference between the bid price of the spread (3.71) and the ask price of the spread (4.24) is quite wide. So you are going to use a Limit Order to get filled somewhere between 3.71 and 4.24.

You only want to enter 1 spread, and you only want to try to enter this trade today, so you use a Day Order, not a Good Till Canceled.

This is the informa?on you’ll need to provide:

1. Account Number: 13579 2. Underlying JNJ Option 1 Option 2 3. Expire January 19, 2018 January 19, 2018 4. Strike 130 110 5. Type Put Put 6. Market Action: Buy Sell 7. Open or Close: Open Open 8. Quantity: 11 9. Order Type: Limit 10. Price: 4.10 11. Time in Force / Duration: Day This is what it looks like in op?onsXpress: VERTICAL CREDIT SPREAD A ver?cal credit spread results when simultaneously buying and selling puts or calls on the same underlying, with the same expira?on date, but with different strikes. The price of the op?on you are selling is higher than the op?on you are buying.

Because of that, the net is cash received, or a credit. The maximum amount that can be made on a Ver?cal Credit Spread is the net credit received. The maximum risk is the difference between the strikes less the net credit received.

CALL CREDIT SPREAD Let’s say you believe interest rates are headed higher. There is an exchange traded fund that is designed to track long-term US Treasury prices: iShares 20+ Year Treasury Bond ETF (?cker TLT). As many of you may remember, bond yield and bond prices move inverse to one another. That means if rates head higher, bonds head lower. Therefore, if you are someone who believes rates are headed higher, then you also believe that bond prices will not move higher.

Credit spreads are strategies designed to make money if something does not happen. A call credit spread is designed to make money if the underlying price does not rise in price.

The call credit spread you choose to trade is to SELL TO OPEN the TLT AUGUST 18, 2017 127 CALL, which is 0.37 bid / 0.41 ask and BUY TO OPEN the TLT AUGUST 18, 2017 130 CALL, which is 0.12 bid / 0.14 ask. Because you are selling the expensive 127 call, and buying the inexpensive 130 call, the net credit of the spread is the bid price of the 127 call minus the ask price of the 130 call. That net credit is 0.23. You would like to enter 5 of the spreads. But you want to get a bigger credit than 0.23, you want a credit of 0.26. That means you need to use a Limit Order. As far as when you want to try to enter this trade, you want to try to enter this trade un?l filled. So, you use a Good Till Canceled (GTC) order.

This is the informa?on you’ll need to provide: 1. Account Number: 97531 2. Underlying TLT Option 1 Option 2 3. Expire August 18, 2017 August 18, 2017 4. Strike 127 130 5. Type Call Call 6. Market Action: Sell Buy 7. Open or Close: Open Open 8. Quantity: 55 9. Order Type: Limit 10. Price: 0.26 11. Time in Force / Duration: Good Till Canceled This is what it looks like in MoneyBlock. Like op?onsXpress, MoneyBlock also uses Dura?on instead of Time in Force.

Similar to debit spreads, you do not provide a price for the individual op?ons! When entering an order for an op?ons strategy that involves more than one op?on, you enter the price for the combina?on. In this case, the order was placed as a limit order at a net credit of 0.26 (per spread) and each spread will be filled at a net price of 0.26 or beDer (more expensive). Since the order was placed as a spread, it must be filled as a spread. That means that the broker cannot sell all 5 of the 127 calls and buy only 1 or 4 of the 130 calls.

When liquida?ng the posi?on, however, the order can go in as a spread or as individual op?ons. PUT CREDIT SPREAD Let’s say that your analysis indicates the has a slight bullish bias, especially the stocks of smaller companies. There is an exchange traded fund (ETF) that tracks an index of small-cap companies. The index is the Russell 2000 Index, and the ETF that tracks the Russell 2000 Index is the iShares Russell 2000 ETF (?cker IWM).

As noted before, credit spreads are strategies designed to make money if something does not happen. A put credit spread is designed to make money if the underlying price does not drop in price.

The IWM AUGUST 18, 2017 134 PUT is 0.93 bid / 0.96 ask, while the IWM AUGUST 18, 2017 131 PUT is 0.58 bid / 0.62 ask. In a put credit spread, you sell the put with the higher strike. Because the trade is to SELL TO OPEN the expensive 134 put and BUY TO OPEN the inexpensive 131 put, you get a net credit.

The amount of the credit is the bid price of the 134 put minus the ask price of the 131 put, which is 0.31. You would like to enter 5 of the spreads. But you want to get a bigger credit of 0.34. That means you need to use a Limit Order.

As far as when you want to try to enter this trade, you want to try to enter this trade un?l filled. So, you use a Good Till Canceled (GTC) order.

This is the informa?on you’ll need to provide:

1. Account Number: 97531 2. Underlying IWM Option 1 Option 2 3. Expire August 18, 2017 August 18, 2017 4. Strike 134 131 5. Type Put Put 6. Market Action: Sell Buy 7. Open or Close: Open Open 8. Quantity: 5 5 9. Order Type: Limit 10.Price: 0.34 11.Time in Force / Duration: Good Till Canceled

This is what it looks like in MoneyBlock.

At the risk of repea?ng myself, no?ce that you do not provide a price for the individual op?ons. When entering an order for an op?ons strategy that involves more than one op?on, you enter the price for the combina?on. In this case, the order was placed as a limit order at a net credit of 0.34 (per spread) and each spread will be filled at a net price of 0.34 or beDer (more expensive). Since the order was placed as a spread it must be filled as a spread. That means that the broker cannot sell all 5 of the 134 puts and buy only 1 or 4 of the 131 puts.

When liquida?ng the posi?on, however, the order can go in as a spread or as individual op?ons. STRADDLES AND STRANGLES Straddles are strategies used to profit from large moves in the underlying. A straddle is the purchase or sale of a put and a call of the same month, same underlying market, and same strike price.

A strangle has the same objec?ve and characteris?cs with one excep?on: different strike prices for the put and call.

STRADDLE Let’s say you’ve been watching Starbucks. Earnings and chart ac?on lead you to expect a lot of uncertainty, and consequently, your forecast is for a big increase in the vola?lity of Starbucks shares. You just don’t know in which direc?on: up or down.

This highlights the power of certain op?ons strategies; you don’t need to guess. With a straddle, you are crea?ng an op?ons strategy that makes money if the stock goes up or down.

You decide to implement 3 long straddles. The straddle trade is to BUY TO OPEN the SBUX SEPTEMBER 15, 2017 57.50 CALL, which has 2.12 bid / 2.14 ask, and BUY TO OPEN the SBUX SEPTEMBER 15, 2017 57.50 PUT, which has 1.60 bid / 1.63 ask.

No?ce how the strike prices and the expire dates of both op?ons are iden?cal. Due to the high degree of liquidity in the op?ons, the bid / ask difference of the straddle is small: 3.72 vs. 3.77. Because the bid/ask is rela?vely ?ght, you choose to go with a Market Order instead of a Limit Order.

This is the informa?on you’ll need to provide:

1. Account Number: Roth IRA-8642 2. Underlying SBUX Option 1 Option 2 3. Expire September 15, 2017 September 15, 2017 4. Strike 57.50 57.50 5. Type Call Put 6. Market Action: Buy Buy 7. Open or Close: Open Open 8. Quantity: 3 3 9. Order Type: Market 10.Time in Force / Term: Good for Day (Day Order)

This is what it looks like in ETrade.

Again, no?ce how the order to enter the trade is placed as a straddle, not the individual op?ons. When exi?ng the posi?on the order can go in as a straddle or as individual op?ons.

Something else to note is that ETrade’s jargon is a bit different as it pertains to how long the order is good for. ETrade calls it “Term”.

Finally, the maximum risk in the example above is the net debit; there is unlimited profit poten?al. STRANGLE Let’s say you have the same outlook for Deere as you do for Starbucks; you expect DE shares to move big. You just don’t know the direc?on.

You decide to buy a strangle. A strangle is very similar to a straddle. The only difference is that the strike prices are different in a strangle. In this example, you will BUY TO OPEN the DE DECEMBER 15, 2017 130 CALL, which has 6.20 bid / 6.40 ask, and BUY TO OPEN the DE DECEMBER 15, 2017 125 PUT, which has a 5.45 bid / 5.60 ask.

No?ce how the expire dates are the same, but the strike prices are different. In this example, you use a Limit Order. That means you want to get in at your price, or not at all. We’ll address the Time in Force / Dura?on / Term on the next page.

This is the informa?on you’ll need to provide:

1. Account Number: Roth IRA-8642 2. Underlying DE Option 1 Option 2 3. Expire December 15, 2017 Dectember 15, 2017 4. Strike 130 125 5. Type Call Put 6. Market Action: Buy Buy 7. Open or Close: Open Open 8. Quantity: 1 1 9. Order Type: Limit 10.Price 11.80 11.Time in Force / Term: Good for 60 Days

This is what it looks like in ETrade.

Again, the order to enter the trade is placed as a straddle, not the individual op?ons. You do not want to get filled on the call and not the put or vice versa. So, it is impera?ve that you enter the trade as a strangle. When exi?ng, however, the order can go in as a strangle or as individual op?ons.

Also, no?ce how ETrade handles Good Till Canceled. They don’t have that semng. Instead, ETrade has Good for 60 Days. That means, if the trade is not filled within 60 days, it is canceled.

Finally, the maximum risk in the example above is the net debit; there is unlimited profit poten?al. WRITE THINGS DOWN Errors happen... from newbies to the some of the most experienced traders on earth.

Almost always, the errors can be aDributed to missing the liDle things. The good news is that as you gain experience, the errors become less frequent.

For beginners, it is essen?al that you keep the errors to a minimum as you move up the learning curve. The most common mistake I currently see beginners make started when weekly op?ons were introduced: people get the expira?on date wrong.

Other poten?al sources of errors occur when you accidentally click Buy instead of Sell. Or you select Open instead of Close. Some?mes we see people place a limit order to buy, then enter the limit as a credit. They’ll never get their order filled.

For experienced traders, the most common severe error is the “fat finger”. That is, you meant to press 1,000, and you ended up pressing 1,000,000.

Because there are so many things that have to be entered correctly, we strongly suggest that beginners write down any order on a piece of paper first.

As crazy as that sounds, this simple step forces you to organize your idea and put everything in wri?ng for you to review prior to you actually gemng on your computer and entering the order. Because once you’re online and using real money, which gets your adrenaline flowing, accurately edi?ng a trading screen can be challenging. KEEPING TRADE RECORDS Proper record keeping is another one of those basic, fundamental ac?vi?es that should become second nature to you. Not only is it important from a pure financial tracking standpoint, you can learn a massive amount by studying what worked and what didn’t.

That’s right, not every op?ons trade will be a winner. And learning from those mistakes will help prevent a repeat. That’s where good record keeping comes in.

There are three sets of records you should always keep up to date.

Individual Confirma^ons Trading Log Open Order Log

INDIVIDUAL CONFIRMATIONS Fortunately, electronic record keeping by brokerage firms is well suited to the first set of records. These digital tools have goDen very sophis?cated and are fantas?c.

TRADING LOG The trading log is a compila?on of informa?on taken from the confirma?ons. Why bother with a log if you have confirma?ons? It is much easier to review a summary of trades than to sort through a bunch of confirma?ons.

I keep my log in a spreadsheet so I can go back and analyze the overall performance of various trading systems we use in our office.

One of the biggest benefits is that I have a ?meline, so I can compare what was going on in the world with what was going on in my straddle and credit spread recommenda?on services.

I can see what worked and what didn’t, and when things worked and when they didn’t. That way I am always learning.

OPEN ORDER LOG Say that you bought a bunch of index call op?ons hoping that the market headed higher. You place a GTC Stop Order to sell the calls to protect the posi?on in case the market turns lower. All Good!

You log on to your computer and see that the stock index spiked 15 points higher at the opening and you decide to get out now. Even BeDer!! You are very excited; this was a great trade; you cannot wait to tell your spouse; must find the nearest Lexus dealer. You sell your posi?on and book the profit. Life Is Awesome!!!

That ajernoon the market turns sharply lower, finds support, then rallies back to the highs. Big problem: You forgot to cancel your Good Till Canceled Sell Stop and are now short a bunch of calls. Say goodbye to the Lexus.

OPEN GTC ORDERS DO NOT GO AWAY AUTOMATICALLY! YOU MUST ALWAYS CANCEL AN OPEN ORDER!

These things do happen because traders forget to deal with their open orders. Most brokerage firms now maintain a log of open orders, whether they are open for the day or Good Till Canceled (or in the case of ETrade, Good for 60 Days).

The Open Order Log will help to eliminate the kinds of problems I just men?oned. By simply scanning your Open Order web page each day, you know immediately which orders are s?ll working and which ones should have been canceled or filled.

And if the brokerage firm reports a fill on an order canceled previously, you have immediate access to very necessary informa?on.

TRADING IS A BUSINESS

How much ?me should you spend on record-keeping chores? As much ?me as needed to keep accurate, helpful, necessary records. Trading is a business for many people. Is it a business for you? GLOSSARY OF COMMONLY USED OPTIONS TERM

AMERICAN STYLE An op?on that can be exercised at any ?me up to the op?on’s expira?on.

ASK The price at which the counterparty is willing to sell. It’s the price at which a trader is willing to buy. Also called the offer.

ASSIGNMENT No?ce to an op?on writer that an op?on has been exercised by the op?on holder.

AT-THE-MONEY An op?on whose strike price is equal or near to the current market price of the underlying.

BETA The rela?onship between the movement of an individual stock or a porkolio and that of the overall market.

BID The price at which a counterparty is willing to buy. It’s the price at which a retail trader is willing to sell.

CALL OPTION An op?on that gives the buyer the right to assume a long posi?on in the underlying at a specific price prior to the op?on’s expira?on date. When assigned, a call op?on seller assumes a short posi?on.

CASH SETTLED OPTION An op?on where the intrinsic value (the difference between the underlying price and the op?on strike price if in a favorable direc?on) is paid to the op?on holder by the op?on seller. Most index op?ons are cash seDled.

COVERED OPTION An op?on wriDen against an opposite posi?on in the underlying market.

CREDIT SPREAD An op?on spread in which the value of the op?on sold exceeds the value of the op?on purchased.

DEBIT SPREAD An op?on spread in which the value of the op?on purchased exceeds the value of the op?on sold.

DELTA A measure of the price-change rela?onship between an op?on and the underlying asset.

EUROPEAN STYLE An op?on that can only be exercised at the op?on’s expira?on.

EXERCISE The process whereby the holder of an op?on exercises his or her right to exchange their op?on posi?on for a posi?on in the underlying (physical delivery) or cash (cash seDled). EXERCISE PRICE The price at which posi?ons are established upon the exercise of an op?on. Also called the strike price of an op?on.

EXPIRATION DATE In the case of American style op?ons, it is the last day an op?on may be exercised. In the case of European style op?ons, it is the only day the op?on may be exercised.

IN-THE-MONEY A term describing any op?on that has intrinsic value. A call op?on is in-the- money if the underlying price is higher than the op?on’s strike price. A put op?on is in-the- money if the underlying price is below the strike price.

INTRINSIC VALUE The value derived if the op?on were to be exercised. Also, the amount by which an op?on is in-the-money.

LIMIT ORDER An order that specifies an execu?on price. The order can be executed only if the market reaches or beDers that price.

LONG POSITION In op?ons, you are “long” the op?ons that you purchased.

MARK-TO-MARKET An adjustment of all open posi?ons to reflect the current price. Each posi?on is credited with profit or charged with loss.

MARKET ORDER An order for immediate execu?on given to a broker to buy or sell at the best obtainable price.

NAKED OPTION An op?on wriDen without an opposite posi?on.

OFFSET Any transac?on that liquidates or closes an open posi?on.

OPTION HOLDER Trader (buyer) who pays a premium to own the rights granted by an op?on contract.

OPTION SERIES Series is equivalent to the expira?on date.

OPTION WRITER Trader (seller) who, in exchange for the premium, agrees to assume the opposite side of an op?on’s exercise at a fixed price any ?me prior to the contract’s expira?on.

OUT-OF-THE MONEY An op?on with no intrinsic value. A call is out-of-the-money if the current price of the underlying price is below the op?on strike price. A put is out-of-the-money if the current price of the underlying price is above the op?on strike price.

PREMIUM The total price paid for an op?on.

PHYSICAL DELIVER An op?on where the actual delivery of the underlying security is delivered to the op?on holder. All equity and ETF op?ons are physical delivery. An op?on that gives the buyer the right to sell (or assume a short posi?on) in the underlying at the strike price. If assigned, a put op?on writer assumes a long posi?on at the strike price.

SHORT POSITION In op?ons, the short has sold an op?on that he or she does not already own. To establish a short posi?on, you would “Sell to Open”.

SPREAD Simultaneously holding a long and short posi?on in two related op?ons with the object of capturing profit from a changing price rela?onship. Spread can also refer to the difference between the bid and the ask price.

STOP ORDER An order to buy or sell at the market when a definite price is reached.

STRADDLE The purchase or sale of both a put and a call having the same exercise price and expira?on date.

TIME VALUE That por?on of an op?on’s premium that represents the amount in excess of the intrinsic value.

UNCOVERED SALE Wri?ng an op?on without an offsemng posi?on in the underlying. Uncovered sales are one form of a “naked” op?on.